INTERNATIONAL AUTOMOTIVE COMPONENTS GROUP s.r.o. v. XUKE TRADING LTD AND ANOTHER

HCMP 546/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 546 OF 2017

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DECISION

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A. Introduction

1.  The plaintiff claims that it is the victim of an email scam.  By originating summons filed herein on 10 March 2017 (“the OS”), the plaintiff asks for a declaration that the sum of €997,000 transferred on 20 September 2016 into the 1^st defendant’s HSBC bank account (“D1’s account”) and thereafter partly transferred into the 2^nd defendant’s HSBC account (“D2’s account”) are funds held on trust for the plaintiff, and for an order that the remaining funds in these accounts be released and returned to the plaintiff.  HSBC has confirmed that D1’s account is now in debit, and only a sum of US$241,453.78 remains in D2’s account (“the Remaining Sum”).

2.  The OS is in the expedited form (Form 10 in Appendix A, Rules of the High Court (“RHC”)). Under Order 7, rule 2(1B) of the RHC, such a form may only be used if it is prescribed under a written law.  There is no such written law in the present context.  The plaintiff should have used the general form (Form 8 in Appendix A, RHC) under Order 7, rule 2(1A).  However, this mistake does not render the OS a nullity, and is a procedural irregularity only (Hong Kong Civil Procedure 2017, vol 1, pp 101 – 102, §7/7/1; Hiew Fook Loi alias Yau Fuk Loi v Yau Wai Yin and another, HCMP 4272/2002 (22 November 2002, unreported), §12).  Mr D’Souza submitted that it is not uncommon for the expedited form to be used in similar claims (eg Wong Yuk Yu v ZH Hong Kong Trading Co Ltd, DCMP 3575/2016 (20 January 2017, unreported)).  While it is understandable that victims of fraud must be eager to get an early hearing date for their court applications to enable them to recover their monies as soon as possible, the end does not justify the means.  A deliberate and intentional failure to comply with rules of the court may, and should, not be condoned.  In this case, Mr D’Souza explained to me that the use of the incorrect form was due to an oversight on the part of those instructing him, and was not an intentional act.  In the circumstances, I am prepared to waive the procedural irregularity.

3.  The OS and related documents were served on the registered address of the defendants on 14 March 2017.  They did not appear at the hearing.  It is clear that the court has power at the hearing of an originating summons to dispose of the action summarily where there are no triable issues, and that such a summary judgment application may be heard in chambers.  The burden in summary judgment applications under the originating summons procedure is on the plaintiff to justify its entitlement to summary judgment.  Hence, although the matter is uncontested, the burden remains on the plaintiff to satisfy me that he is entitled to summary judgment on the remedies sought in the OS.  (See Choy Pui Lam v The Personal Representative of the Estate of Chan Yim Mei, deceased, HCMP 313/2015 (30 March 2017, unreported), §7.)

B.  The plaintiff’s case

4.  The plaintiff, a company incorporated in the Czech Republic, is a subsidiary of International Automotive Components Group S.A. (“the IAC Group”), which supplies interior automotive components and systems around the world.  Mr Robert Stevens Miller (“Mr Miller”) is the President and CEO of the IAC Group.

5.  On 20 September 2016, Ms Marie Kopecka, the Finance Manager of the plaintiff at that time, received a phone call from a person who introduced himself as Mr Miller.  The caller was in fact an imposter.  Through a number of phone calls and emails on that day, the imposter managed to persuade Ms Kopecka to transfer €997,000 to D1’s account. 

6.  Upon discovery of the scam shortly after the said transfer, the plaintiff took various steps to trace the whereabouts of its funds.

7.  The bank records disclosed by HSBC show that, after the sum of €997,000 was deposited into D1’s account, it was withdrawn completely by four withdrawals on the same day.  It appears that the whole sum was transferred to D2’s account and another account held by the 2^nd defendant in Hang Seng Bank.

8.  In particular, two sums in the amount of €982,031 and €7.61 respectively were deposited into D2’s account.  Apparently, these sums were then converted into US dollars; and were then withdrawn or transferred out of D2’s account by different installments on the same day, leaving US$241,453.78 in the account.

9.  A sum of US$630 was returned from the D2’s account to the D1’s account.  As a result of subsequent withdrawals, there was a balance of US$11.59 in D1’s account.  However, HSBC in its letter dated 17 March 2017 stated that it had exercised its right of set off for bank charges; and hence, D1’s account is now in debit.

10.  In short, in respect of the two HSBC accounts held by the 1^st and 2^nd defendants respectively, only a sum of US$241,453.78 now remains in D2’s account.

11.  Company search conducted by the plaintiff reveals that the 1^st and 2^nd defendants are apparently owned and run by individuals residing in Mainland China unknown to the plaintiff.  The plaintiff has never had any dealing with either the 1^st or 2^nd defendant.

C.  Analysis

12.  The defendants did not appear; and hence, the plaintiff’s evidence is unchallenged.

13.  When property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716).  This principle has been applied by the Hong Kong court on numerous occasions in similar circumstances as shown in precedents cited to me by Mr D’Souza.

14.  There is no suggestion, let alone evidence, that the 1^st and 2^nd defendants were entitled to receive the sum of €997,000 or any part thereof from the plaintiff.  I am satisfied that they are both liable to account for the sum of €997,000 as constructive trustees.

15.  As to the Remaining Sum, as it is traceable to the amount of €997,000, I agree that the plaintiff is entitled to a declaration that the 2^nd defendant is holding this sum on trust for it.  Such a declaration is necessary to affirm that the plaintiff has a proprietary interest over the Remaining Sum (Mesirow Financial Administrative Corporation v Best Link Industrial Co Ltd HCMP 1846/2015 (25 January 2016, unreported), §38).

D.  The plaintiff’s position as against HSBC

16.  While the plaintiff is entitled to an order that the 2^nd defendant shall return the Remaining Sum to it, in practice, it is virtually certain that the 2^nd defendant will not comply with such an order.  The question is how, in law, HSBC may be procured to release the Remaining Sum to the plaintiff.

17.  In the letter dated 17 March 2017, HSBC stated that, while it adopts a neutral positon and does not intend to dispute the plaintiff’s interest in the Remaining Sum, it is not a party to this action and the order sought by the plaintiff makes no reference or direction to HSBC.

18.  In order to resolve this difficulty, on 21 March 2017, the plaintiff took out an ex parte application pursuant to Order 15, rule 13A of the RHC for a direction that notice of this action be served on HSBC.

19.  As I had reservations whether this is the proper procedure, I invited Mr D’Souza to submit a supplemental written submission on this issue.  Mr D’Souza submitted that legal practitioners have formulated 3 different methods to resolve the said issue:

    (1) To apply for a vesting order;

    (2) To issue a notice to non-parties; or

    (3) To apply for a garnishee order.

D1.  Vesting order

20.  In Guaranty Bank and Trust Company v Zzzik Inc Ltd HCA 1139/2016 (18 July 2016, unreported), DHCJ Cooney SC made a vesting order pursuant to sections 52(1)(e) and 52(5) of the Trustee Ordinance (Cap 29) (“the TO”).  In that case, the bank had been included as a respondent to the plaintiff’s summons for default judgment.

21.  Section 52(1) of the TO provides that:

“ In any of the following cases, namely —

…

(e) where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient,

the court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the court may appoint …”

Section 52(5) provides that:

“ The court may make declarations and give directions concerning the manner in which the right to transfer any stock or thing in action vested under the provisions of this Ordinance is to be exercised.”

22.  I must say that I have serious reservations whether section 52 of the TO may be invoked to compel a bank to release funds in a bank account in these circumstances.  Section 52(1)(e) refers to the vesting of the right to “sue for or recover the thing in action”.  As the balance in a bank account represents a debt owed by the bank to the account holder, it may be regarded as a thing in action.  Hence, the right to sue for or recover such a debt may be described as a right to sue for or recover a thing in action.  However, in the present context, the plaintiff does not merely want to have the right to claim the debt payable by HSBC (represented by the Remaining Sum) to be vested in its name.  Quite simply, it wants to have the Remaining Sum back.  Further, as submitted by Mr D’Souza, unless the bank is joined as a party (which is unusual in these circumstances), the bank will be deprived of the right to make representations on whether a vesting order and consequential directions should be made; and if so, the terms thereof.  Nevertheless, it is unnecessary for me to come to a conclusive view on these legal issues because, unlike Guaranty Bank and Trust Company v Zzzik Inc Ltd, HSBC had not been joined as a party in this case; and the plaintiff has not applied for a vesting order.

D2.  Notice to non-parties

23.  This is the method adopted by the plaintiff in this case.  Mr D’Souza submitted that a notice to non-parties may be made under Order 15, rule 13A or Order 44, rule 2.  Such method was used in Cherrypicks Ltd and another v Hong Kong Shopley Trading Co Ltd DCMP 3330/2016 (13 March 2017, unreported), §26.

24.  As to Order 44, rule 2, Order 44, rule 2(1) provides that:

“ Where in an action for —

(a) the administration of the estate of a deceased person, or

(b) the execution of a trust, or

(c) the sale of any property,

… the Court may when giving the judgment … direct notice of the judgment to be served on any such person [who will be affected by the judgment.]”

I am unable to see how the present action can be regarded as an action for “the execution of a trust”.  More importantly, there is an important issue whether the word “trust” includes a constructive trust.  This takes me to Order 15, rule 13A.

25.  Mr D’Souza relied mainly on Order 15, rule 13A.  Order 15, rule 13A(6) provides that:

“ This rules applies to any action relating to —

(a) the estate of a deceased person; or

(b) property subject to a trust.”

26.  The question is whether the word “trust” includes a constructive trust.  There is no definition of this word in either the RHC or the High Court Ordinance (Cap 4).  However, Mr D’Souza drew my attention to the following statutory provisions:

(a) Under section 2 of the TO:

“ trust(信託) trust does not include the duties incident to an estate conveyed by way of mortgage, but with this exception the expression trust(信託) and trustee(受託人) extend to implied and constructive trusts, and to cases where the trustee has a beneficial interest in the trust property, and to the duties incident to the office of a personal representative ….” (emphasis added)

(b) Section 2 of the Limitation Ordinance (Cap 347) provides that the word “trust” shall have the same meaning as that in the TO.

27.  It is clear that section 2 of the TO does not apply to the RHC because it provides expressly that the meaning of the expressions defined in that section shall apply in the TO (unless the context otherwise requires) only.

28.  The phrase “property subject to a trust” also appears in Order 15, rule 13(1)(b), RHC, which concerns the making of a representation order appointing a person to represent a person or class of persons in the proceedings in question.  Reading Order 15, rule 13A as a whole, and together with Order 15, rule 13, it appears to me that the word “trust” was intended to refer to an express trust.  More importantly, the absence of an express definitive clause similar to section 2 of the TO in the HCO or the RHC, which extends the meaning of “trust” to “constructive trust”, indicates strongly that the word “trust” in Order 15, rule 13A(6), does not include or extend to constructive trust.  Mr D’Souza has not been able to find any authority supporting his submission that the word “trust” in this context includes constructive trust.

29.  For these reasons, I am not satisfied that the court can serve a notice to non-parties in these circumstances pursuant to Order 15, rule 13A (or Order 44, rule 2).

D3.  Garnishee order

30.  As mentioned, the plaintiff is entitled to an order that the 2^nd defendant shall repay the Remaining Sum in D2’s account to the plaintiff.  By virtue of such an order, the plaintiff becomes a judgment creditor and the 2^nd defendant becomes a judgment debtor.  On the other hand, the relationship between the 2^nd defendant and HSBC is one of creditor and debtor.  In the normal course of event, HSBC is liable to pay the Remaining Sum in D2’s account to the 2^nd defendant upon its demand.  This appears to be a typical situation where the plaintiff may apply for a garnishee order against HSBC pursuant to Order 49, RHC.

31.  Mr D’Souza acknowledged that garnishee proceedings are often used by victims of fraud to recover monies in bank accounts in these circumstances.  However, he submitted that, if the plaintiff applies for a garnishee order against HSBC in this case, it will (or may) lose its proprietary interest in the Remaining Sum.

32.  I do not think Mr D’Souza’s concern is well founded.  Garnishee proceedings are simply an enforcement procedure.  It is correct that the service of a garnishee order nisi would create an equitable charge over the debt in question due to the judgment debtor.  However, the sole and limited purpose of such equitable charge is to ensure that the garnishee will hold the funds pending the court’s determination whether the order nisi should be made absolute; and that, in the meantime, the garnishee cannot pay the debt to anybody but the garnishor without incurring the risk of having to pay it over again (Hong Kong Civil Procedure 2017, vol. 1, §49/3/3 at p 969).  In other words, the garnishee has become the custodian for the court of the whole fund attached (Astro Nusantara International Ltd BV v PT Ayunda Mitra [2012] 4 HKLRD 855, §24).  A garnishee order nisi will not and cannot otherwise affect the proprietary interest in the funds in the bank account in question.  Hence, if it transpires that the judgment debtor is merely holding the monies in the bank account on trust in favour of a third party (who is not the judgment creditor), the court will not make a garnishee order absolute and will discharge the garnishee order nisi (see eg Incorporated Owners of Million Fortune Industrial Centre v Jikan Development Ltd and another HCA 14915/1998 (26 June 2003, unreported); Chan Lap Kit and another v Yushun Technology Ltd DCCJ 130/2016 (24 January 2017, unreported)).  Quite simply, the court will not allow the judgment debtor to use monies not really belonging to him to satisfy a judgment debt.

33.  In the present case, it is correct that the Remaining Sum in D2’s account does not belong to the 2^nd defendant beneficially.  However, it does not belong to any third party at all; instead, it belongs to the judgment creditor, namely, the plaintiff.  In the circumstances, I fail to see any reason why a garnishee order cannot or should not be made; or how the plaintiff’s position may be prejudiced if it applies for a garnishee order.

34.  Mr D’Souza also raised the concern that the bank may have a potential right of set-off.  As mentioned, HSBC has indeed exercised such right in relation to D1’s account.  However, such potential issue has nothing to do with any garnishee proceedings.  The bank’s potential right of set-off is based on its contractual relationship with the account holder, namely, the 2^nd defendant in this case.  If the beneficial owner of the funds wishes to challenge the bank’s right of set-off, it will be open to it to do so in the garnishee proceedings (see Hong Kong Civil Procedure 2017, vol 1, §49/3/14 at p 970).   Once again, I fail to see why the plaintiff’s position will be prejudiced.

35.  For all these reasons, in the present case, I take the view that the proper and appropriate method for the plaintiff to recover the Remaining Sum in D2’s account is to apply for a garnishee order.  Mr D’Souza invited me to make a garnishee order nisi if I see fit.  I am afraid that I do not have the jurisdiction to do so since the plaintiff must follow the procedure prescribed by Order 49, rule 2.

E.  Conclusion and orders

36.  In the premises, I shall make the following orders:

(a) A declaration that the defendants are liable to account to the plaintiff for the sum of €997,000 as constructive trustees;

(b) A declaration that the sum of US$241,453.78 remaining in the bank account of the 2^nd defendant held at HSBC under account number 848-826269-838 (together with any interest accrued thereon) are funds held on constructive trust by the 2^nd defendant for the plaintiff;

(c) An order that the 2^nd defendant shall pay and return the said sum of US$241,453.78 (together with any interest accused thereon) to the plaintiff forthwith;

(d) The defendants do pay the plaintiff’s costs of these proceedings to be taxed if not agreed.

37.  As mentioned, with these orders, the plaintiff may apply for a garnishee order regarding the Remaining Sum.